Getting to know C&I property: Investing in property.

Posted On Monday, 10 February 2003 02:00 Published by eProp Commercial Property News
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Holding out for future benefits.

Jonathan SmithInvestment entails sacrificing a specified amount of money now, in  anticipation of a future benefit. Sometimes the future benefit can be determined with accuracy and the  risk attached is very low (or non-existent) and sometimes the risk of  the investment is high. Where the risk of the future bene-fit is  high, the investor seeks compensation by requiring a higher return. Investment in fixed property requires a decision based on the  predicted benefits of:

  • The timing of the expected future cash flow benefits;
  • Magnitude of the benefits; and
  • The riskiness of the expected benefits.

DIRECT VERSUS INDIRECT OWNERSHIP
Investment in property can be through direct or indirect ownership. Direct ownership implies that the property is registered directly in  the owner's or co-owners' name(s), while indirect ownership implies  that ownership is maintained via an investment vehicle, such as  shares in a property owning company or within a property unit trust.

WHAT DOES AN INVESTOR ACTUALLY BUY?
It is more accurate to say a commercial property is primarily  purchased on the basis of the cash stream which is, or will in  future, be attached to it rather than on the value of the bricks and  mortar in the development.

HOW INSTITUTIONS INVEST IN FIXED PROPERTY
Institutional involvement in the property sector is by means of  shareholdings in both listed and unlisted companies. About 70% of the listed property (real estate) sector of the is held by institutions.

REASONS FOR HOLDING PROPERTY
Investors hold property to achieve a return on their investment for  the benefit of stakeholders. About 60% of the world's capital market
is invested in fixed property. There are three factors that motivate the investor to make an  investment an in income-producing fixed property:

  • There is the net income to be made from rent collections, after  operating costs.
  •  Capital gain to be made from the increase in value which a  commercial property achieves in an inflationary environment.
  •  Investors hold commercial property to achieve diversification.  Diversification results in lower risk across a portfolio of  investments.

 

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